Belfast Telegraph

German bank chief in favour of increasing emergency fund

Future banking regulations must be changed to allow some banks to fail, Bundesbank president Axel Weber said in a speech in Dublin yesterday.

The German central banker told a financial services audience in Trinity College, Dublin: |“Bank failures have to be allowed to happen.”

Regulations need to address the issue of moral hazard or another crisis will happen, he added.

Mr Weber, who is widely tipped to become the next head of the European Central Bank and is now busy helping to draft a new regulatory framework for world banks, said the basic answer must be to increase the amount of money lenders have to keep in reserve for emergencies, known as the Tier 1 capital ratio.

The Tier 1 capital ratio should be highest for banks which have a systemic importance and are too big to fail, Mr Weber said. This will discourage many banks from seeking to become classed as being of systemic importance.

While Mr Weber did not comment directly on banks in Ireland, Finance Minister Brian Lenihan has said he stepped in to save Allied Irish Banks and Bank of Ireland from collapse because they were of systemic importance.

Mr Weber added that supervisors should be able to choose restructuring over bailing-out.

“Restructuring involving private investors would be the first choice and clearly preferable to direct public intervention,” he added.

Belfast Telegraph